Choosing A Screen

There's more than one way to skin a cat, and more than one way to build a stock portfolio. The purpose of AAII's stock screening area is to provide you with access to a wide range of investment approaches. Some approaches follow the methods of well-know professionals, and allow you to implement their "style of investing," while other approaches implement time-tested techniques used to identify attractive stocks. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth. Some approaches are geared toward large-company stocks, while others uncover micro-sized firms. Most fall somewhere in the middle. There are even a number of specialty screens that attempt to gauge the stock selection impact of a single variable-such as earnings estimates revisions. Needless to say, the characteristics of these stock investment approaches vary widely.

It is important to understand the investment characteristics of any approach you are using. By browsing through the passing companies tab of a stock screen, you can get a better idea of the kind of companies that a screen favors along with a sense for any industry concentrations that a screen may generate.

AAII tracks the results of the screens on this site. Every month we update each screen using Stock Investor Pro and post a new list of passing companies. The results are usually posted in the middle of each month using data from the previous month's end.

The performance of the stocks passing each screen is tracked on a monthly basis. The month-to-month closing price is used to calculate the return, which assumes an equal investment in each stock at the beginning of each month. The impact of factors such as commissions, bid-ask spreads, cash dividends, time-slippage (time between the initial decision to buy a stock and the actual purchase) and taxes is not considered. This overstates the reported performance, but all approaches are subject to the same conditions and procedures. Higher turnover portfolios would typically benefit more from these simplified rules. Sell rules are the same as the buy rules: The screens are simply reapplied using each subsequent month's data. Thus, a stock is "sold" (no longer included in the portfolio) if it ceases to meet the initial buy criteria, and new stocks are added if they qualify. Stocks that no longer qualify are dropped even if the strategist behind a particular approach suggests different sell rules versus buy rules.

What Works Best

In terms of any judgment concerning which screen appears to work best, we recommend that you look at the long term returns as well as recent performance. Understand that the screen portfolios that we present are merely computer-generated lists, based on our own interpretation of popular investment approaches. Screens following the approach of an investment guru do not represent their actual stock picks. The rules of each screen are defined by our interpretations of their respective investment approaches. The criteria or rules used to generate the list of passing companies are presented for each strategy.

That being said, our screen tracking results are quite revealing. If you want to examine the numbers, complete performance statistics—including year-by-year return figures—they are presented in the performance table. Note that you can also gain access to this table by clicking on "Performance" link of the Stock Screens main page. Remember that past performance is no guarantee of future success.

The Portfolio Characteristics table presents a snapshot of the characteristics of the stocks that made up each portfolio at a specific point in time. This table is updated semiannually and provides an indication of the types of stocks that each strategy tends to hold.

Category Definitions

Click here to see how we categorize the screens that AAII makes available.

Conclusion

Keep in mind that the screens here are our own interpretations of the investment approaches advocated by numerous strategists. While we have attempted to illustrate a practical set of rules for each approach, the screens are only the first step. We recommend that you use them to generate an initial list of potential investments that merit further research. In addition, the monthly updates do not replicate a buy-and-hold strategy, which is the optimal approach for an individual investor.

When determining which screen(s) you want to follow, you need to ask yourself the following questions:

• How is your screen of interest reacting relative to the current market environment? If it is deviating substantially, what is the cause of that deviation-is it the individual stock picks, or is it a deliberate over-concentration caused by the screen's investment methodology?

• Are the screen's characteristics more similar to a value-based or growth-based approach? Any screening approach that you follow should match your individual needs and risk tolerance.

• What is the proper benchmark to measure the performance of your screen and its resulting stock picks? It is important to look at the characteristics of your portfolio (market capitalization, industry concentration, growth vs. value) so that you can properly evaluate the performance.

• How frequently does your list of "passing companies" within a screen change? If trading is frequent, you need to consider developing "hold" criteria; selling whenever initial buy criteria is no longer met may cause you to sell winners too soon.

• Most importantly, remember that screening is just a first step. There are qualitative elements that cannot be captured effectively by the very quantitative screening process that we present. Detailed fundamental analysis of any stock you are considering for purchase is necessary for successful investing.